Settlement with Vodafone? Government asking for trouble

I am not a lawyer, nor a CA. I haven’t been following the Vodafone case in great detail either. Hence, these are general concerns about Cabinet Committee on Economic Affairs (CCEA) authorizing Finance Ministry to have conciliation talks with Vodafone. We have Rs 20,000 crore a tax dispute – around Rs 8000 crore as principal, around Rs 6300 crore as interest (since 2007) and around Rs 5700 crore as penalty. Was government justified in making a tax demand for acquisition of Hutchison Essar? In 2012, Supreme Court thought no and the Court was only interpreting law of the land. Often, when court judgments have been unfavourable, India (and other countries too) has amended legislation. In principle, estoppel provisions don’t apply to tax law and legally, there is nothing wrong with amending tax legislation retrospectively. However, just because something is legally tenable, that doesn’t necessarily mean one should do it. Retrospective provisions, not just for tax law, introduce uncertainty. It is no different for a forest, environment or biotechnology clearance that is retrospectively opened up. When investors, domestic or foreign, look at investment climates, there is less resistance to prospective changes for the future. You may be unhappy with provisions of land acquisition law, but you know what the law is. Retrospection means law has changed for the past, affecting circumstances under which a decision was taken.

In its greed for garnering tax revenue and its greater greed for increasing expenditure, Finance Ministry thought otherwise. Therefore, in 2012 we introduced the offensive provision in Finance Bill and we didn’t think through implications. Had we thought it through, something as important as this would have figured in budget speech and not been buried in fine print of Finance Bill, as something innocuous. ine, so an error of judgment has been committed and we desire to announce to the world that everything is fine with India’s investment climate. Surely, the first step is to accept a mistake has been made and repeal the relevant section in Income Tax Act. Yes, this means going to Parliament. But even if legislation is stuck in Parliament, government seems keen to push for ordinances, if it is something regarded as important. If I don’t wish to do that, let it wind through the judicial process, whatever be the number of years it takes and whatever is the eventual outcome. Vodafone wanted conciliation under UNCITRAL. Government (the Cabinet authorization) wants it under Indian Arbitration and Conciliation Act. As far as I can make out, this 1996 Indian law applies to disputes between two private parties, not to situations where one side is a private party and the other side is the government.

In other words, to use the 1996 legislation, we need to go to Parliament to amend it. Therefore, if going to Parliament is an argument against repealing the section in Income Tax Act, that argument equally applies to using the Indian Arbitration and Conciliation Act. Hence, it seems as if both sides are going through motions of conciliation and thus, there is an agreement about non-binding nature of conciliation. If one was interested in settling the issue, what was wrong with waiving penalty and interest and even reducing the principal by 50% and making an offer to Vodafone on this? Since Vodafone is interested in the Indian business and no one desires to alienate the government, there would probably have been some kind of agreement. If one is going to use legal jargon, mediation is a step before conciliation, arbitration and adjudication. As was the case with 2012 amendment to Income Tax Act (which could have easily been repealed in 2013), a lot seems to be in the nature of ad hoc and knee-jerk reactions, without a coherent plan. Let’s assume we eventually have some kind of agreement.

That’s going to be an agreement specific to Vodafone. Does that remove the investor community’s skepticism about uncertain policy? I don’t think so, because fundamental uncertainty remains. It is just that something special is being done for Vodafone. That’s a bad idea and discretion works against transparency and certainty. Even if government and Vodafone decide to close the case, someone will probably go through court through a PIL. As government, we are asking for trouble. I wonder what kind of discussion took place in CCEA before the decision was taken. Probably none (this isn’t Food Security Bill), which is why we are in this mess. Finance Ministry made a presentation and that was it.

DISCLAIMER : Views expressed above are the author's own.

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Bibek Debroy is an economist, columnist and author. He has worked for the government, for an industry chamber and for academic (teaching and research) institutes. He is the author of several books, papers and popular articles. He is now a Professor at the Centre for Policy Research, Delhi

Bibek Debroy is an economist, columnist and author. He has worked for the government, for an industry chamber and for academic (teaching and research) insti. . .